Channel Strategy Formulation in Industrial Marketing

Formulating the channel strategy  in industrial marketing involves an analysis of conditions  which have a bearing on the best choice among structural alternatives and on the  relationship between them and the manufacturer which will be most productive.  In general, the industrial marketer has a choice of three types of  structural arrangements.

  1. Direct to users – through the manufacturers own sales force, with or  without a network of branch warehouses.
  2. Indirect to users – through agents or wholesale distributors. The choice  of an indirect channel system involves the choice of a selective (only one or a  few outlets in each market area) or intensive (a number of outlets in each market  area) relationship.
  3. Mixed structure – the nature of the structural network differs with the  segmentation of the market. One segment may buy the manufacturer’s product  in standard grades, while another may want special quality variations. While  indirect distribution may be suitable for the former, direct distribution may be  required for the latter.

Some conditions which influence the choice of industrial channel structure arise  from the nature of the market; others are related to the peculiarities of the  product; still others are linked to the character and situation of the firm itself.

  1. Is the market horizontal or vertical? If a product can be sold only to the  members of one or a few industries, and the number of firms in each industry is  small, direct distribution is the most profitable method. A few salesmen will be  needed to make direct contact with all probable users. Closer contact can be  maintained with customers and prospective customers, and the sales are usually  improved by this method.  If, on the other hand, the market is horizontal and the product must be  sold to buyers in many industries, the number of buyers is large, and the chances  of economically reaching all or a large portion of them usually are enhanced by  selling through distributors.
  2. Is the market potential large or small? If the nature of the product is such that a  substantial volume of sales is available in the average area served by a single  salesman or branch warehouse, direct marketing may prove profitable. If, on the  contrary, the probable volume of sales in a market area is small, the direct  method may be too expensive.
  3. To what extent are the possible purchasers concentrated geographically? The  tendency toward localization of industry makes it possible to market direct to the  user many industrial products whose small sales volume would preclude the  possibility of selling direct, even to retailers, if they were consumer goods. If 70  or 80 percent of the total possible sales volume of a product is concentrated in  one or two limited market areas direct marketing is viable.

In the past, it was common for purchasing officers in large firms to  insist on buying direct in order to avoid paying the distributor’s margin,  and in the hope of getting quantity discounts. Many firms have streamlined  purchasing by setting up continuing relations with selected suppliers with  whom orders are placed by telephone, unpriced simplified purchase order,  or even a tub-file inventory punched card.  For this system to work, the purchasing officer must select one or two  distributors and place all his orders with them. This increases the importance  of the distributor as an outlet for the makers of many supplies, materials,  and component parts. It also may be expected to decrease the effectiveness of  the limited franchise arrangement, whereby the manufacturer markets  through only one or two distributors in a market area. How far it will go and  how long this method of buying will last are unanswered questions. To  streamline the expensive order procedures the following points are to be  considered.

  • What is the gross profit margin?
  • How volatile is the price?
  • Must the product he installed?
  • How much technical service does the product require in use?
  • How important is quality?
  • How bulky is the item?
  • What kind of repair and maintenance service does the user need and how  much?
  • What is the firm’s size and financial position?
  • What are the seller’s marketing objectives?

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